KENANGA RESEARCH (APRIL 4): We maintain “neutral” on the export-dependent sector that will not be spared the global economic slowdown over the immediate term. We also see European manufacturers gradually making a comeback in a more significant way on the heels of the sharp drop in their gas prices, giving Malaysian manufacturers a run for their money. Europe’s benchmark Dutch Title Transfer Facility (TTF) gas futures price has come off by over 80% from its recent peak of above €300 per MWh to below €40 per MWh, thanks to a mild winter in Europe. Nonetheless, Malaysian producers may be able to draw some comfort from the consensus that is still pointing to Dutch TTF gas futures prices to average at €50-€60 per MWh in 2023.

On the other hand, Malaysian producers have to contend with rising energy costs following the hike in electricity tariff in January. We believe this is manageable as typically electricity only makes up 4%- 6% of the total production cost of plastic packaging players. Also helping is the Green Electricity Tariff programme of Tenaga Nasional Bhd that offers an exemption from the imbalance cost pass-through surcharge of 20 sen per kWh via a subscription charge of 3.7 sen per kWh (resulting in an effective savings of 16.3 sen per kWh). However, this offer to buy renewable energy is capped at 30% of total electricity consumption, subject to the availability of quota and only valid for six months ending June 30, 2023, for now. We understand that Thong Guan Industries Bhd, BP Plastics Holding Bhd and Scientex Bhd have signed up for the programme.

Our top pick for the sector is Thong Guan. We like the company for: (i) its earnings stability underpinned by a more diversified product portfolio; (ii) its earnings growth prospects underpinned by expansion in production capacity for premium products such as nano stretch films and courier bags, and deeper penetration into the Europe and US markets; and (iii) its product innovation via research and development and collaboration with the likes of ExxonMobil to create more environmentally-friendly products.

Petronas Chemicals Group Bhd
Target price: RM7.35 HOLD

MAYBANK INVESTMENT BANK RESEARCH (APRIL 4): PetChem’s olefins and derivatives (O&D) division average selling prices (ASPs) have likely found a bottom following modest 1Q23 gains and are further supported by the Organization of the Petroleum Exporting Countries and allies (Opec+)’s decision to scale back oil production through to December 2023, but its fertilisers and methanol (F&M) division outlook appears gloomier with ASPs having declined sharply to two-year lows.

We maintain that PetChem’s product price outlook remains unexciting in the near term. While acknowledging that the surprise moves by Opec+ could provide a much-needed floor to generally soft O&D ASPs owing to its close price correlation to crude, regional demand has been uninspiring due to a combination of healthy supply, uncertainties over economic growth and China’s reopening, with supply and demand dynamics likely balanced in the near-to-medium term.

While making no changes to our forecasts and target price of RM7.35, we upgrade the stock to a “hold” on a balanced present risk-reward proposition.

Ranhill Utilities Bhd
Target price: 70 sen BUY

MIDF RESEARCH (APRIL 4): Ranhill, via a consortium with Sabah Energy Corp Sdn Bhd (SEC), has been selected by the Energy Commission as the successful bidder for a 100MW combined-cycle gas turbine power plant under a 21-year power purchase agreement.

The plant is to be located on the west coast of Sabah (Kimanis) with a final commercial operation date by March 2026. Gas supply is expected to be sourced from Sabah Oil and Gas Terminal. Ranhill will hold a 60% interest in the project with SEC holding the remaining 40%. The new plant will expand Ranhill’s power capacity in Sabah by 26% to 480MW, sealing its position as the largest independent power producer in the state with a 30% market share.

Our checks with management yesterday suggest a potential capital expenditure of RM600 million for the new plant. We estimate that the new plant could generate an incremental equity value of 11 sen per share (RM138 million) based on Ranhill’s 60% stake — this translates into a potential 16% increase to our current target price of 70 sen.

Magni-Tech Industries Bhd
Target price: RM2.25 OUTPERFORM

PUBLICINVEST RESEARCH (APRIL 4): As Magni’s major customer has been strategically drawing down on its excess inventory built up during the pandemic, we believe that its inventory levels are likely to taper off. This should lead to a potential increase in orders for Magni in 2HFY24. Furthermore, we think that Magni’s long-term growth will be supported by the growing athleisure market.

According to Grand View Research, the global athleisure market is expected to grow at an eight-year CAGR of 8.9% to US$662.6 billion by 2030. Therefore, we are expecting sales to recover in FY24. While Magni does not have a formal dividend policy, the group has been consistently paying out dividends with a five-year average of 35% dividend payout ratio. That being said, we are forecasting a 35% dividend payout ratio, translating to an attractive dividend yield of about 5%.

We believe that the stock is currently trading at an undemanding valuation, which is about six times its forward PER. All told, we maintain our “outperform” call on Magni with an unchanged target price of RM2.25.